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Thinking About a New Career Direction in
'08? Here's How to Prepare For Your Own Business
If you've ever fantasized about quitting your job and
starting a business, you're certainly not alone. But it's
definitely not something to do on a whim.
A business startup requires parallel planning in advance for
your business and personal finances. That's because business
owners — even those who are acquiring ongoing businesses or
starting their own companies on the cheap — quickly find their
business and personal finances are inextricably linked. So
instead of saying you're going to start a business in 2008,
commit to making a solid financial plan for that business in
2008 for a launch later on.
Here are some basic steps to consider right now:
Start with advice. You need not one, but two sets of
financial advice when starting a business. The first involves
the viability of your business concept. You should understand
your business idea inside and out before you launch and what
your new company's immediate and long-term cash needs will be.
The second set of advice involves your own finances and how
prepared you are for what will surely be a major lifestyle
transition. Because new business owners frequently underestimate
their new business's expenses starting out, they can find
themselves funding those business needs out-of-pocket. That
means less money for day-to-day living expenses as well as
long-term planning for retirement. That's why it's critical to
consult a tax and financial expert such as a Certified Financial
Planner™ professional at the outset.
Focus on your debts first. With the possible exception
of mortgage debt, there's very little "good debt" in
the life of a businessperson. So while you're researching your
business concept and putting together your own financial plan,
start cutting back and erasing as much credit card and
adjustable-rate debt from your life as possible. While you might
find that plenty of people might want to lend you money as a new
business owner, remember that you'll have the most flexibility
in your business — and your life — when you owe as little as
possible.
Start thinking about your legal business structure.
Your personal financial situation and the kind of business
you're starting should determine the legal designation of your
company. Before choosing a business structure, such as a sole
proprietorship, S or C corporation, partnership, Limited
Liability Partnership (LLP), or Limited Liability Company (LLC),
owners should reflect on their business in the context of their
overall financial life and ask themselves a series of questions:
- Is the business going to be your primary source of
personal wealth and daily cash flow, or is it a side business?
- Do you expect the business to pay for your retirement?
- Do you want it to provide other financial benefits?
- Do you want to pass it on to family members or sell it to
existing employees or outside buyers?
The answers to these
questions figure importantly into the decision, along with other
key factors such as what type of business it is, its risk
factors, current tax laws, and regulations such as workman's
compensation.
Get your emergency fund in shape. While it's wise for
everyone to have 3-6 months of cash set aside for basic living
expenses in case they lose their job or face a medical
emergency, emergency funds are particularly necessary for new
business owners. Startups can be particularly expensive, and
most businesses are not profitable from day one. Better yet,
plan an emergency fund not only for yourself, but for the
business as well.
Plan your healthcare and other basic benefits.
Automatic benefits are the plus side of working for someone
else. When you're working for yourself, you become your own HR
department and chances are you won't be able to match your old
employer's buying power. If you support a family with these
benefits or if you have particular health concerns, you need to
price the out-of-pocket costs of such benefits before starting
your own company — depending on the business and the cost of
those benefits, you might want to rethink your plans.
Price disability coverage now. You might have
short-term disability coverage as part of your current employee
benefits, but that will likely end once you quit your job. You
should price long-term disability coverage based on your present
working salary so you can qualify for the highest possible
benefit. Disability coverage is critical for self-employed
people since they're their own support system.
December 2007 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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